The historic idea of ’real estate’ or ’real-property’ is founded in the English common-law concept of land, which is defined as the property of a person and all the structures and fixtures and other things affixed to or integrated with that land. But what does it mean in the digital age? Paul Zalkin, a managing director in our restructuring and insolvency team looks at the factors driving the real estate sector today.
In everyday language we know of real estate as the flats, houses and care facilities where we live, the retail spaces in which we shop, the offices in which we work, warehouses to store goods, the cinemas, sporting venues, bars, theatres and restaurants where we enjoy leisure activities. There will always be real estate.
If we consider our everyday understanding of “real estate” it seems clear why the sector must remain dynamic and ever-evolving: as our social, cultural, personal, and economic needs change, the real estate we use must change too. In some respects, this creates an odd contradiction relative to the perceived permanence of the structure and buildings which we automatically associate with real estate. However, for investors, it is this dynamism which creates opportunity.
Fiscal and monetary value drivers
Within the UK, the real estate sector has its own set of complex fiscal rules which the government can use to stimulate the market. A recent example of positive stimulus was the change in the stamp-duty payment threshold for home buyers, announced in response to the first national lockdown. It is thought to have led to a rise of over 40% in the volume of transactions.
In April 2017, the UK government similarly used a change in tax rules to create a disincentive for amateur investors seeking to build a nest egg in the residential buy-to-let market. The end to mortgage-interest relief caused an exodus of such investors from the market − part of a policy to promote housebuilding for owner-occupation and to dampen the inexorable rise in house prices.
Benign monetary conditions have been a key driver of rampant value inflation in the UK real-estate market for over 13 years. The Bank of England base rate has adjusted from 5.75% in July 2007 to just 0.1% in March 2020. It has not been above 1% since February 2009.
With money so cheap to borrow, equity markets in a state of flux and bond yields comparatively low, where better to invest than in real estate?
If it was that easy, everyone would be doing it
Anyone working in the real estate sector during the build-up to and aftermath of the global financial crisis will have witnessed the devastation caused by subprime mortgage-backed securities and collateralised debt obligations. These products embodied a toxic disconnect between fundamental value underpinning mortgage security and the value of derivatives, as a means of trading, speculating and hedging debt risk.
As a cautionary tale for real estate investors, the message is simple: to succeed, you must understand the fundamentals of your asset; understand the arbitrage between the return your asset will generate and the cost of capital required to deliver that return; keep a careful eye on your investment, and leave plenty of headroom for the unexpected.
The UK market today and looking forward
Slow and steady is the prediction for growth, with parts of the real estate market outperforming the economy while others suffer price deflation.
There is an undersupply of residential property in the UK. We need to build more flats and houses that will provide for the needs of a growing but ageing population. There will also be an increasing demand for residential care facilities – in particular, care homes providing specialist care that addresses the medical needs of the very elderly. Additional medical facilities will be needed more generally to serve the needs of the growing, ageing and increasingly unhealthy population.
It is too early to accurately predict the scale of the long-term impact of coronavirus on the demand for residential and office real estate. Early indications support a trend from urban to rural living and a decline in demand for permanent city-centre office space. In contrast, the demand for flexible office space – including space on the periphery of urban centres – may increase. Of course, these new ways of living or working have not simply been forced upon us by national lockdowns; this is part of a longer-term trend driven by digitisation, automation and advanced telecommunications.
The high-street retail landscape has changed beyond recognition. And it is now inevitable that traditional retail as we have known it for the last 50 years will continue to change fundamentally over the next decade. Put simply, Amazon has won the battle.
The prediction is that much of the high-street will be dominated by specialist retail, food and beverage, leisure, convenience retail and retail showrooms like the Apple Store and Tesla’s shopping-centre based stores. However, the demise of traditional retail has resulted in a huge increase in demand for warehouse space and fulfilment centres in out-of-town locations with excellent transport links.
The UK’s economy is now well and truly post-industrial but remains a global leader in specialist and hi-tech manufacturing, biotech, aerospace, and pharmaceuticals − industries which tend to operate from high-value facilities, the demand for which will continue to increase.
Finally, as part of the transition to a post-industrial economy over the last 50 years, the UK’s real estate sector has seen the emergence of buildings suitable for call centres and back-office administrative fulfilment, the demand for which is likely to remain strong.
How we can help
Our real estate sector team specialise in areas including:
- Renegotiation or refinancing of real estate debt
- Restructuring of property portfolios
- Advising landlords on tenant issues
- Undertaking due diligence on prospective tenants
- Management and buildouts of developments through administration
- Receiverships over both low- and high-value commercial real estate
- Resolving matrimonial disputes involving real estate.
Recent projects include: advising on the sale of online property management platform Urban.co.uk to Howsy, leading a refinancing deal to safeguard the Liverpool Docks development project and spearheading a restructuring deal to rescue Bradford City Centre development project.